Uber Uber Alles, Or Why We Can’t Rely Solely on Uber to Improve Transportation

The best of all monopoly profits is a quiet life. – Sir John Hicks

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A lot of people who are fans of free markets and technological innovation praise Uber as the poster child of market competition and ending crony monopolies like taxis. The ridesharing service promotes greater resource utilization and echoing the work of Hernando de Soto, brings a lot of dead capital to life, enabling low-income groups to become entrepreneurs in a world where regulation keeps them out. Even the Republican Party is trying to exploit the disruptive dynamism of Uber to claim themselves as “the party of Uber” (even if Uber has been saying things contrary to the GOP’s ideals). Contrast this to a lot of progressives who have made Uber their rallying call against unregulated markets. And yet, even economists widely agree (an unfortunate rarity), that on net, Uber is an improvement in people’s lives, for the obvious reasons.
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I have used Uber about a dozen or so times, and have never had anything short of a wonderful experience. The drivers were always courteous, and many times we have had conversations about Uber, the taxi-monopoly, and the state of technological improvement. It might be where I currently live, but these drivers were ethnically diverse, often second-generation immigrants from North Africa and the Middle East, and some commented about how Uber was substantially improving their even friends and family’s lives back in their home countries. I have even thought, on multiple occasions, of driving for Uber.
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Yet, even as the taxi monopoly is obviously trying to bring Uber down, in a some ways, Uber itself is bringing itself down. Or, at least, it is smearing the ideal that we really want it to be. It’s CEO has been saying a lot of shady things, prompting the media to say Uber has an “a-hole problem.” Uber has been dealing with a lot of criticism over the way it has been engaging with its rivals such as Lyft and Sidecar. It seems Uber allegedly uses a lot of shady tactics to make it more expensive for Lyft. Maybe these claims are overblown or even misrepresented, in hopes to benefit Uber’s rivals.
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None of this is to mention the cries of “price gouging” when Uber multiplies its rates during peak hours, and media attention given to horror stories of short trips with high bills. A friend of mine took an Uber on Halloween night about 10 miles for $250. While as a consumer in that situation I too might be irate, the greater principle of peak-load pricing is perfectly fine by me, it’s even socially beneficial. High prices signal information about relative scarcity, and induce new drivers to start offering their services. While you might save money by taking a cab in those situations, the “cost” you incur will instead be the hours waiting for that cab (if you can get one at all). And then there is the kicker, you can always chose not to take the Uber.
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But the most troubling developments about Uber is that it is starting to play the Taxi monopoly’s own game against its rival ride-sharing companies:

In September, though, the company hired former Barack Obama adviser David Plouffe specifically to work with local governments. “Uber should be regulated,” says Plouffe, who hails the legislation he hammered out in Washington, D.C. as “groundbreaking legislation [that] provides a model going forward.”
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That model is one that gives clear advantages to Uber, which has more market share and political clout than its rivals such as Lyft and Sidecar. What the legislation does is establish “burdensome new ridesharing regulations” dictating minimum ages of drivers and other requirements that will make it more difficult for competitors to catch up to Uber or enter new markets in the first place. (Time

In the end, we must remember that Uber is a business, and the goal of every business is to become a monopoly. The reason Uber has been such a force for good is that it opened up the stagnant monopoly of the taxi cabs to one of convenience and innovation precisely because it stood as a rival competitor. The taxis were able to crush competitors because of the favorable regulation that they were able to co-opt from regulators.

Uber broke this very stable equilibrium because it was able to exploit technological progress in software to come up with a clever way to offer a more convenient service to consumers, and an equally clever way around the pro-taxi regulations: it’s not a taxi service, it’s just a software app that connects people who want to share rides that happens to be in exchange for money, and you cannot hail one from the street.
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But now that Uber has taken prominence over its own competitors, we should not at all be surprised that it would seek to use regulation to favor itself and make its rivals less competitive. Given favorable (but highly unlikely) circumstances, they would become the new taxi monopoly and we would be stuck back at square one. The only way to ensure consumer satisfaction and innovation is by the threat of rivalrous competition. 
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Thus, as economists and advocates of free markets, we must remember to be vigilant of the abuses of individual businesses — we are pro-market, not pro-business. Only through open competition can we enable the wealth-creation that allows us to live the good life. Even the most innovative company will use free-market rhetoric just long enough to allow them to capture enough market share to start turning to the political process to switch from earning profits by creating value for consumers to collecting rents and deterring entrants.
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This is in no way a call to smear or boycott or prohibit Uber or ridesharing. We just have to realize that without reforming the capturable regulation itself, we risk our heroes becoming the villains once they are strong enough.

Equilibrium, Disequilibrium, Non-equilibrium

Equilibrium and non-equilibrium systems have been a recurring theme at many panels in this year’s SEA conference leading me to muse on the differences between them. Please note that non-equilibrium is not the same things as disequilibrium. The difference being that disequilibrium is a property of some systems that have (stable or unstable) equilibria, usually used to characterize the dynamics of the system when outside of equilibrium. On the other hand non-equilibrium systems are systems that do not posses equilibria.
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One common, avoidable, and completely unnecessary confusion is that the way one can tell the difference between disequilibrium and non-equilibrium is through stability analysis, of the type that can only be carried out with mathematical models. We must not confuse physics envy for analytic sophistication. This view entails confusing non-equilibrium for systems with unstable equilibria (typically by analyzing the properties of fixed points in dynamic systems, Strogatz has posted all his lectures online, Yey!). But non-equilibrium is a category that applies to systems, not a property of those systems that have equilibra, a category mistake.
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Consider the definition of economic equilibrium: the vector of prices and the vector of quantities such that all possible gains from trade have been exploited. Two things that have been extensively pointed out by others are immediately apparent, equilibrium can never describe any real economic system unless all change is considered to be exogenous to the system. It then follows that if we assume that all change is exogenous, entrepreneurship is a disequilibrium path that characterizes the response of the system after it gets jolted out of equilibrium. In an equilibrium universe entrepreneurship is the name we give to disequilibrium, which is then by definition always equilibrating. This is as formal a definition of a closed ended economics I can give imagine. An open ended economics can then be defined simply as a non-equilibrium economics, and while it may seem difficult all it entails is to recognize that economic models are not representations of reality in the same sense that physics models are. Entrepreneurship is driving the dynamics (but what of coordination? more on that to come) of the non-equilibrium system, while in equilibrium/close-ended economics, entrepreneurship is merely the name we give to disequilibrium adjustment of the system.
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Is there a pendulum of low-skilled workplace satisfaction?

One of the reasons given for why we see minimum wage increases leading to smaller drops in the quantity of labor demanded than we’d expect from a simple supply-and-demand graph is that employers don’t like to fire people. It’s easy to imagine that this argument has some merit. How would you feel breaking the news to somebody that he doesn’t have a job anymore, especially a low-skilled worker who was performing acceptably before the increase, especially knowing that you’ll be the one blamed for it? I think this effect is probably weak—the people who would be long-run managers would end up being the kinds of people who accept having to do their unpleasant duties—but it could have some non-negligible effects at the margin.
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A complementary argument is that employers adjust to MW increases by working employees harder to get more value out of them once they have to pay them more. (I also think this is an important puzzle piece.) Putting together the first and the second arguments, it seems like there’d be an important consequence of MW increases in low-skilled environments: more workplace tension. This is hard to measure, of course, but not impossible. Perhaps some workplaces already do this. If this idea holds water, periodic employee surveys, including managers, over a long enough timeline could show periods of increasing dissatisfaction and returns to stable levels of satisfaction. This would help fill in some of the details about labor force adjustments that many researchers are currently grasping at. Again, I don’t expect to see large changes, but they might be big enough to observe.
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Readers, I’m not wedded to this idea but I think it’s interesting to consider. What do you think?where to buy oakley sunglasses

The specter of neoliberalism

When I talk about international economic policy with my students, one of the models they use to analyze it is a bizarre potpourri concept known as “neoliberalism”. I understand the appeal of the framework to non-specialists: there are good guys and bad guys, and because it’s so broad your pet concept probably always fits in. The problems, as I see them, are that it has good guys and bad guys, and it’s so broad that your pet concept probably always fits in. While it’s valuable to have some moral lens to see the world through, it’s crucially important for intellectually responsible people to separate questions of fact from questions of values.
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It’s sobering to have to remind people that Pinochet, Thatcher, and Reagan were not economic theorists, they were political leaders. In light of what we know from public choice theory it should be no surprise that political leaders sometimes do Bad Things. But ideas about how societies should go about seeing resources distributed and the limits of human ability to engineer broad-based solutions to social problems don’t depend on anything these politicians did.
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Most people are not familiar with the history of economic thought, and don’t understand how the failures of the orthodox Keynesian theory that dominated the West after World War II became so apparent that the intellectual tides changed in the economics profession long before any real policy changes resulted. It was because of these failures that new theories came to the fore, ultimately becoming accepted enough even to have some small influence on policy. (Small because public choice problems never went away.) If Jimmy Carter had won the 1980 US presidential election, he would have done many of the same things that Reagan did, because that’s what his economic advisers would have advised, because that’s what people who studied the topic had come to agree on. In fact, airline deregulation happened under Carter, not because Carter wanted to unleash the rich and powerful on all of us poor saps, but because that’s what the technical consensus had come to. We hardly even think about it anymore, but without that policy change many of us might never have been on planes before, much less been on planes enough to have routines for how we spend our time on flights. Lowering at least some barriers to trade was an idea whose time had come.
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For people unfamiliar with the history of economic thought it was a tale of certain people rising to the top and using their power to make massive and very bad policy changes. If you think that the top-down theories that had dominated policy prior to the change were the obviously right ones, then the only thing that makes sense is that people consciously torpedoed them, and probably people who were ill-intentioned. But that doesn’t hold up entirely. It wasn’t Reagan and Thatcher who killed orthodox Keynesianism. As a technical paradigm it was dead when they arrived. That they did many other things people still don’t like is beside the point.
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It’s tempting to succumb to a moralistic framework. It has a very primal appeal. But it makes me think of 1 Corinthians 13:11: “When I was a child, I used to talk as a child, think as a child, reason as a child; when I became a man, I put aside childish things.” Many of the things people get emotional about are really technical issues, and it’s the responsibility of academics and analysts to treat them that way, especially in front of non-specialist company.

Cargo Cult Development: Signaling in the upper echelons of higher education

Ecuador, my home country, is hell-bent on increasing the production of individuals with advanced degrees. Through highly (ridiculously?) onerous regulatory requirements, generous scholarships, and billions of dollars invested in higher education infrastructure, the self proclaimed socialist of the XXI century government has led a big push for higher education. Although the claim is grounded on the positive externalities of education and the formation of human capital as necessary for development, I have always wondered whether the big push for education is more like cargo cult development rather than genuine development. What the pacific islanders did not understand when they built their airstrips and waited for goods to fall from the sky, is that airstrips and the accompanying capital structure that produces goods are consequences of development and not their cause. It is fair to ask whether governments undertaking massive investments in education like building billion-dollar research sites are they making the same mistake.
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Of course the immediate reply by most economists is that education is not like cargo cult development because we can identify the mechanism behind such development, specifically in endogenous growth models. The logic is that increasing human capital, especially in advanced degrees, increases the production of knowledge that due to its non-rivalrous and partly non-excludable nature spills over the productive sector and raises productivity and standard of living for all. Thus the positive externality of knowledge justifies public investment in R&D in this case by subsidizing the production of individuals with more advanced degrees. After all the mantra of economic growth for a little over 20 years has been that the generation of ideas is the “real” driver of growth. While these arguments certainly help advance our understanding of the determinants of growth in broad strokes, they also point to the limitations of an institutionally barren production-function-for-the-whole-economy approach to growth (more on this to come).
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The signaling model of education presents a more immediate challenge to the big push for education policies. While not completely denying the human capital-forming role of education, the signaling model challenges the relative importance of human capital in education. The signaling model implies that there are negative externalities to subsidizing education. By lowering the cost of acquiring a degree, the signal of worker quality is degraded because more low quality workers get through the selection mechanism (obtaining a degree). A new signal is needed to separate between worker qualities, leading to more expenditure of potentially productive resources in a sort of arms race of higher education degrees. If education does not lead to great improvements in human capital but is driven by primarily by signaling instead, even if there are positive spillovers from knowledge, subsidizing education may not be such a great bet, especially since the contribution of the signaling mechanism is negative in social terms.
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I am very sympathetic to the signaling argument (Bryan Caplan makes a very convincing case) and I think they are often/mostly/always ignored by those making big push for advanced degrees policies, and shouldn’t be. However when I do manage to engage advocates of big-push-for-advanced-degrees, two arguments always come up against the signaling model.

1) Even if the formation of human capital is small relative to signaling it is still there, and low-income countries have much more to gain from small increases in human capital (which then leads to knowledge creation that spills over and increases productivity).

2) While signaling may play a large part in lower end (undergraduate degrees) degrees, in advanced degrees (doctoral degrees) it is mostly human capital and not signaling, thus government spending in advanced degrees is an investment in human capital (which then leads to knowledge creation that spills over and increases productivity).
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My partial objection to 2) is that human capital and signaling are potential explanations for the investment (present expenditure aimed at greater future income) aspect of education. But there is also a consumption (present expenditure aimed personal satisfaction) aspect to education. The more advanced the degree, not only does the human capital component (presumably) increase, also the consumption aspect of education increases as well. Why pay for something individuals will probably pay for themselves in search of their own satisfaction (and benefit us with all the great ideas that spill over from their activity, maybe)?
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A further interesting possibility with respect to 2) is given in this post on The Economist’s Free Exchange blog (based on this JEP paper). If advanced degrees are aimed at improving human capital that increase the productivity of those generating knowledge, a good proxy for human capital formation and knowledge creation in advanced degrees is the research productivity of graduates. The low productivity of economics graduates as Free Exchange notes can be interpreted as a sign that signaling is very prominent for those pursuing the most advanced degree in Economics. It would be very interesting to see research productivity in other disciplines as a test of the significance of signaling in advanced degrees in general.
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The Modern Challenges to Science

[This is a modified repost of an article I had originally posted on my now-defunct personal blog. I repost it here for two reasons: (1) I think the subject matter at hand is still extremely important and relevant, and (2) I will make frequent reference to this in upcoming posts.]
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Imagine your pet political group that makes claims you find stupid or offensive: racists, creationists, the Westboro Baptist Church, whomever. However incorrect we might think personally they are, most of us find silencing them to be unfair, since they have a right to be heard and granted an equal say in our tolerant, deliberative, modern democratic society. This is precisely the point of this post. The modern challenges to the progress of science are not so much creations of the religious fundamentalists on the political right (though this undeniably still exists), but more so from the humanitarian and egalitarian arguments commonly associated with the political left.
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One of the best books I have read in recent years, period, is Jonathan Rauch’s Kindly Inquisitorswhich makes precisely this point.  The book is slightly dated (printed in 1995), but there was a new edition out this year [that I have yet to read] with more recent anecdotes.  Nonetheless, the arguments are timeless, and even the anecdotes from the 1980s and 1990s Rauch uses to illustrate his points are eerily similar to examples we still might see in our media and discourse today. Permit me to paraphrase his argument, with my own commentary.
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There are three main challenges against the progress of science:

The first is the “Traditionalist Challenge” – the obvious and easily visible ones from religious fundamentalists.  They argue that those who know the truth should decide who is right.  Invariably, each religious sect (insofar as it is making descriptive claims about the world, not simply providing religious services) is certain that they, and only they, know the truth, and necessarily must control and censor all contrary opinions as blasphemy through an inquisition.  Clearly when multiple sects hold different beliefs, the only resolution to decide who is right is through violence.  We don’t need to spend a lot of time dissecting and overcoming this authoritarian challenge because that has already happened, slowly and painfully, over the last several centuries.  This challenge comes from a minority that most people today ignore or mock, compared to the other two.
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The second is the “Egalitarian Challenge.”   This is the rather appealing argument that since everyone is equal, everyone’s opinions claim an equal right to respect.  A more radical version of this principle is that for those political classes that have been historically oppressed, their opinions should be disproportionately respected more than those opinions of historically privileged classes.  Intuitively, at least the non-radical version sounds perfectly sensible, and one is hard pressed to morally argue against it.  But even so, this would stop science in its tracks if followed it to its full implications.   There is a big difference between equal opportunity to participate in science (which is untenable to reject) and  the equality of treatment of one’s scientific results.   Einstein was an outsider to the scientific community, a Swiss patent clerk nobody, but he was elevated with scientific praise because his predictions were verified – if he had predicted instead that gravity was made of cheese, he would be rightly dismissed as a crank and never would have left the patent office.

There is a strong difference between knowledge and belief here.  My fictitious Einstein is totally fine to continue believing gravity is made of cheese, even after being rejected by the scientific community.  We can certainly respect his belief as his own opinion, which he has every right to, however odd it may be.  But that is one thing.  It is a completely different matter when these beliefs are made policy relevant, and are to be taught to others as knowledge. It would be a horrible world for the progress of science if knowledge was made by voting and campaigning between political groups.  When we are forced to be given equal time for different viewpoints in our national discussion, we make marginalization illegal.  We will be living Bertrand Russell’s nightmare, where “the lunatic who believes that he is a poached egg is to be condemned solely on the ground that he is in the minority” (Rauch 1995: 118, my emphasis).  

The third, and related challenge, is the “Humanitarian Challenge.”  This is another appealing argument that says everyone has a right not to be harmed.  More specifically, people have a right not to have their feelings or inherent dignity hurt and be told their beliefs are wrong.  This is another admirable moral belief, but it would again halt the progress of science, which, for better or worse, is made entirely on the basis of proving past beliefs wrong.  There are plenty of anecdotes about the personal tragedy of scientific careers (even lives) ended because a different scientist proved their theory wrong.  But while these costs are concentrated on those scientists who put their theory at stake, the benefits are dispersed across all of society, who are now elevated to greater understanding and knowledge.  
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If we were to follow this challenge to its conclusions – science is viewed as a form of violence against others.  Fighting words over different theories are viewed just like bullets.  And how do we prevent violence?  Through active policing and a greater monopoly of violence – so we’ve secretly returned to the inquisition from the Fundamentalist Challenge (ibid: 131).  Nobody has a right not to be offended, which of course would imply that any opinion that they personally did not like ought to be suppressed.   So why do we tolerate the racists and the bigots and the pseudoscientists?  Because the alternative would be worse.  Instead, we simply criticize, ignore, and marginalize them from public discourse – certainly more humanitarian than the alternative.
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Finally, Rauch defends the only robust alternative, what he calls the “Liberal Principle of Science” (note “liberal” here is akin to the more broader “classical liberalism,” rather than the modern progressivism we Americans attribute to the word in politics today.)  The liberal principle is defined by two key tenets (ibid: 48-49):

  1. “No one gets the final say: you may claim that a statement is established as knowledge only if it can be debunked, in principle, and only insofar as it withstands attempts to debunk it.”  Science, unlike faith, or pseudoscience, is constantly being updated and is never fixed.  Newtonian physics gives way to Einstein’s relativity, which gives way to Quantum Mechanics, which may give way to something in the future.  Scientific theories only persist as far as they have not yet been invalidated.
  2. “No one has personal authority: you may claim that a statement has been established as knowledge only insofar as the method used to check it gives the same result regardless of the identity of the checker, and regardless of the source of the statement.”  Anybody at all can play the science game.  There are stories of nobodies disproving scientific theories originally posited by Ph.Ds and experts.  Access to the scientific community in principle is free (it is obviously not perfect or costless), one need only be able to demonstrate and argue the truth or falsity of a claim.

Thus, science progresses by criticism.  Those whose theories about the world have been demonstrated to be incorrect (such as the phlogiston theory, the miasmic theory of disease, or most notably, the Ptolomeic model of the heavens) are marginalized and ignored.  They can certainly still firmly hold these beliefs about the world and we cannot fault them for that, but for them to try to pass these disproven beliefs as scientific knowledge, we have no choice but to risk their offense for the sake of human progress.  Whether this is morally and psychologically comforting or not, the alternative is just too costly.
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Science, and the reason for its success, is not just the method that we learn in 8th grade.  Indeed, most of science is not done in this discrete, systematic, and methodologically monist way, and there are those, like Paul Feyeraband, that argue there is no uniform scientific method.  What is more important is the institutional framework of science – the scientific community and its relationships.  A number of authors, like Michael Polanyi, have written on the importance of viewing “science” as an institution and a community.  It is a bottom up, emergent spontaneous order of individual scientists pursuing their own research agendas, linked and checked by other scientists and mechanisms like peer review, publishing in academic journals, and academic conferences. Vlad’s post on how to disagree with the economic mainstream, and more specifically, his recent paper on this topic emphasizes this insight. 

Put another way, an individual scientist can very easily do bad science – cherrypicking examples, abusing statistics, falling victim to confirmation bias, and a host of other problems.  Indeed, there are often incentives encouraging one to do so – one can only publish an interesting result, so there is every reason to ignore non-interesting but important null results, or to cook the numbers to make it look interesting. But the community as a whole does good science because of the mechanisms that correct these errors and criticize and weed out the bad science.  Since science works through criticism, it pits the reputation of scientists against one another to incentivize each individual scientist to prove the others wrong and bask in the limelight.  The liberal community of science is not perfect – there is no perfect institutional arrangement – but it is far better than any comparable alternatives.

Emergent meta-order

The Constitution and By-Laws of the Hopi Tribe went into effect on December 16, 1936. Prior to this, the tribe was in a constant state of chaos and mayhem for a thousand years.
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No, actually, the tribe was governed peaceably and well by customary law, including customary constitutional law. That is, there were always rules that governed interactions between people and among groups of people within the Hopi tribe, and there were always higher-order rules about how rules would be adopted or modified. They were often tied into the Hopi religious system. They may not have been written down, but they were as real a force in Hopi life as the written constitution of 1936 is today.
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One of the major motivations for a written constitution was that the United States government had gradually taken over the land around them (and around the Navajos, whose present-day reservation encircles Hopi land) and they were also beginning to be absorbed into the US economy. They were increasingly interacting with the expanding US—sometimes voluntarily, but not always so—a novel situation to the tribe and therefore not part of its constitutional and legal system. For exapmle, the distribution of land had previously been handled by customary law, with land owned by clans and assigned to members of clans; new land began to be cultivated and passed down in accordance with US law, which required updating the Hopi legal system.
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The law & economics fields deals largely with emergent law, but the constitutional political economy field seems mainly to focus on what features would make for good constitutional design. Granted, it is much harder to study implicit constitutions, and in the modern era we think of constitutions as something a single entity creates consciously. Also, the field of constitutional political economy has been concentrated in and on the United States, where a written constitution is in force. But Britain, for example, has an implicit constitution, not created but emergent. By better understanding emergent constitutions the field would be better able to cross-pollinate with fields like development. If our logic is good—and it is—we can take it far.Discount Oakley sunglasses

Interstellar Blasts Out of the Hollywood Distribution Mold

The recent Christopher Nolan blockbuster Interstellar is grabbing headlines all over the internet for its scientific innovation and uniqueness within Hollywood. This post isn’t a review of Interstellar–suffice it to say you need to go see it, I’m still debating with my friends exactly what happened in the movie (and for what it’s worth, here’s a theory that I find most plausible). What is interesting and novel, about Interstellar, and Christopher Nolan, is just how the film was made, namely how atypical it was in the usual Hollywood scramble for copyrights and control between studios and the artist.
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A number of news articles came out profiling the cult director and describing just how unusual this process was. This post is an opportunity for me to point out the role copyright has the on economic structure of the film industry, and highlight Christopher Nolan’s success as one of the exceptions that prove the rule.
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The average Hollywood film follows a pretty common formula in terms of both subject area and distribution mechanism. Despite all the rhetoric that copyright ensures the independent artist she can put bread on the table for her work by giving her recourse against ungrateful pirates, the entertainment industry in the 21st century really is just a continuation of ancient patronage of the arts in modern form. Instead of wealthy elites sponsoring an individual artist like the Medici did for da Vinci, the Pope for Michelangelo, and the Duke of Tuscany for Gallileo, we have large movie studios bearing the cost of producing movies for artists and filmmakers in exchange for copyrights and a cut of the profits. In the U.S., there are the “Big Six” film studios–Warner Brothers, Disney, Universal, Sony, 20th Century Fox, and Lionsgate, which collectively accounted for over $8 billion, or 75% of all industry revenues in 2013. Independent filmmakers do exist, of course, but in the end often cut deals with the Big Six and turn over their copyrights in exchange for tapping into the big boys’ distribution network in hopes of reaching an audience of more than just midnight viewings staffed by hipsters.
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Maybe that’s all well and good, assuming the goal is simply to “promote the Progress of Science and useful Arts” for the public welfare, as Article I §8 of the U.S. Constitution mandates. Economies of scale allow for a more efficient distribution mechanism to serve consumers, if not always the artists. The problem is that in the process, the rights to display the film, as well as the right to prevent others from viewing the film without authorization (i.e. “copyright”) are always transferred to the film studios. These firms, rather than the artists, are the ones with both the financial resources and the political muscle to hunt down infringers and to capture the regulatory process to put these copyrights to work maximizing their rents at the expense of consumers and taxpayers. But that’s for another post.
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Naturally, the Big Six aren’t going to accept any “I’ve got a brilliant idea!” pitch willy-nilly. Often they will seek a movie idea that is safe, and simply hire out the director to produce their movie. Sometimes this reaches absurd levels, where simply to protect a right from expiring, they will intentionally produce an awful B-movie version, like the 1994 Fantastic Four film. Furthermore, in the midst of the threat of internet piracy, studios and producers now demand control over a wider swath of revenue streams than just box office ticket sales: merchandise. And what produces merchandise like no other? Franchises full of sequels, plots ripped off of books, and reboots of sequels of plots ripped off of books. For better or worse, studios stick to the conservative revenue-maximizing formula of big action blockbusters with little arete but lots of explosions capable of spawning sequels with rapid diminishing returns to substance.
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This is where Nolan and Interstellar come in to kick things apart, rather than kick the can down the road. Love or hate his movies, he, along with James Cameron, or Steven Spielberg, is one of the few artists who can pitch a standalone movie to a studio and get wide liberties to produce it. Interstellar is (so far as we know), like Nolan’s previous Memento, The Prestige, and Inception (though notably the Batman trilogy was a franchise/reboot cash cow), a standalone movie without a big opportunity for franchising or sequels, and is original content rather than a rehash of a book (though some Heinlein fans may be shaking their fists). In fact, the prospect of this one film captivated Warner Brothers so much that in exchange

For the right to distribute Interstellar internationally, Warner Bros traded the rights for two of their franchises, Friday the 13th and South Park, plus “a to-be-determined A-list Warners property”, while its subsidiary, Legendary, agreed to trade Batman v Superman: Dawn of Justice for a further piece of the pie. To say this disregards the reigning economic logic of modern Hollywood is not quite right – it reverses the normal logic by which Hollywood operates. Franchises are the lifeblood of the studios. For Warner Bros to hand over the rights to two of its well-known properties, representing money in the bank, for the opportunity to take a spin on an original idea – a film with no sequel potential and few merchandising opportunities, based on the dimly understood recesses of quantum physics – speaks both to the value placed by the studios on Nolan, and also the extent to which he has become a franchise unto himself. (Guardian)

Nolan is also very strategic about his expenditures: he always comes in under-budget. This is a big plus for Big Six in seeking him out, but there’s also an ulterior motive that benefits Nolan:

“What he realised very early on was that the moment you give the studios an excuse to come in, you’ve lost it,” said Emma Thomas, Nolan’s wife and co-producer…“We watched it happen,” Thomas said. “The moment you go over budget, you’ve lost the creative control than an obsessive director like Chris needs.” (WSJ)

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While perhaps people value Nolan’s movies as art for art’s sake, what really helps them stand out is the rest of the noise in Hollywood. Now if only people who appreciate movie substance can find an alternative mechanism to raise films to the same level of success– crowdfunding perhaps? Then again, maybe what makes indie films indie is the fact that they’re not Hollywood blockbusters…

 

Proprietary cities and institutional change

Alex Tabarrok has an interesting post on proprietary cities in India.  He writes,

In Lessons from Gurgaon, India’s private city (working paper) found in a new book Cities and Private Planning  Shruti Rajagopolan and I explore this question. Gurgaon, which I have written about before, shows both the successes and failures of private development. On the surface, Gurgaon is a gleaming, modern city built nearly overnight on wasteland. Gurgaon was built, however, without benefit of planning and its failures–most notably poor and inefficient provision of  water, sewage, and electricity–are a warning. The failures all stem from high transaction costs, Gurgaon’s private developers have simply not managed to Coasean bargain and internalize externalities. It’s clear from Gurgaon that cities need advance planning–a reservation of rights of way for water, sewage and electricity at the very minimum–but does the planning have to be provided by government which is often incapable of such foresight?
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The lessons of Jamshedpur, India, suggest another approach. Jamshedpur is a private township, planned from the beginning by visionary businessman Jamshetji Nusserwanji Tata, who, after travelling to the United States to see Pittsburgh, returned to India to found Tata Iron and Steel. Jamshedpur has been run by a single, integrated entity for over 100 years and as it is integrated it has internalized externalities. As a result, Jamshedpur, India’s other private city, has some of the best urban infrastructure in all of India.

While supplying good infrastructure is important, it pales in comparison to the importance of institutions.  If these developers are going to spend hundreds of millions or billions of dollars why not lobby the state to opt out of onerous laws.  Florida created a special district for Disney to create an amusement park.  Surely the benefits to India would be far greater.
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SEZ growth

 
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The Growth of SEZs suggest governments are increasingly willing to grant local legal autonomy.  Proprietary cities could start by opting out of licensing laws and other trade restricting legal burdens.  Such a process would have to be carefully managed, but eventually (or sooner) allowing a proprietary city to hire a common law judge to adjudicate disputes seems to have little downside.  Why not give it a try?
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Edit: Thanks Tom Bell for the graph.  Be sure to watch out for his new book Your Next Government?

What’s wrong with economics?

The recent economic crisis has brought about an entire chorus of complaints about economics. Student groups request changes of curricula, institutes for new economic thinking became more prominent, Eugene Fama got a Nobel Prize. Oh wait… I think most of these critiques have been misguided and, yeah, Fama is pretty awesome. These critics are a little bit like complaining that meteorologists don’t control the weather better or that geologists do such a poor job at predicting when exactly San Francisco is going to suffer the next big earthquake. But still, I think there are many things that are shaky with mainstream economics.
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Before I give you my draft list, here’s how not to complain about mainstream economics. Don’t just pick your pet theoretical peeve and whine that other people don’t find it as interesting or important as you do. That’s not “failure of economics”, it’s either your failure to explain your position or, blasphemy!, you’re wrong. A failure of economics can only be institutional, i.e. somehow you have to show that the organization of the economics profession is a priori biased against certain positions. You can have either an emergent order argument about this (the bias is part of no one’s intention or strategy, but it occurs in the aggregate for some reason) or a corruption story (the economics profession gets captured by certain interest groups). So, here’s a list of such likely institutional failures:

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  1. The sources for macroeconomic data are mostly governmental. Not only do they suck, e.g. according to the data the Earth as a whole has a $300-$700 billion trade surplus with outer space, but we also don’t know exactly just how much each piece of information sucks – amazingly, all the numbers in the, e.g., World Bank dataset come without margins of error. As you may imagine, governments have a vested interest to distort the data in particular directions.
  2. The intended use of data determines what kind of data one gathers. Most macroeconomic data is intended to serve the purpose of government controlling the economy. To control the economy one does need some understanding of how it works in terms of causes and effects, but, still, one is going to be biased towards a very aggregated perspective, because the possible levers of control are few. James Buchanan & Richard Wagner have a classic paper on this, “The political biases of Keynesian economics” and Peter Boettke has recently restated their argument.

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These two arguments are about emergent order biases. Here’s also two corruption stories:

  1. The editors of all major monetary economics journals have and have had personal connections with the Federal Reserve. Larry White is pretty convincing that this is indeed a problem as these journals act as a filter as to what counts as respectable opinion about monetary economics.
  2. Most economists writing about business rely on businesses for their empirical data and have personal connections with firms that make them biased in favor of business interests. Luigi Zingales has recently caused a bit of a splash making this argument, and also being careful to point out that being pro-business is quite different from being pro-market. (His discussion with Russ Roberts about this is pretty interesting too.)

What else?
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PS. Here’s my recently published paper on how a scientific community works and about which factors can bias science (and which are less likely to do so).